Wallace Turbeville

Recent Articles

Last week, Professor Charles M. Jones, a noted economist at Columbia, published an opinion piece in POLITICO claiming to enlighten readers on the realities of high-frequency trading (or “HFT”), computer driven trading at millisecond speeds driven by complex algorithms based on complex trading strategies. This has surfaced as the subject of politically charged debate in the context of of a proposed financial transaction tax that would, among other things, curb the most excessive forms of HFT. The POLITICO piece and a longer, academic-style article were published simultaneously. These articles catalogue existing claims of the benefits of HFT and dismiss concerns of the potential harm of such activity. Perhaps the most important bit of information does not appear in the articles. It can be found at the very end of the press release by Columbia Business School announcing the article: “ The research was supported by a grant from Citadel LLC.” The interest of Citadel in the subject is clear...

Last night, the Senate Permanent Subcommittee on Investigations released a searing 300-page report on JP Morgan Chase’s London Whale episode. The bank lost at least $6.2 billion through trading credit derivatives in a business unit tasked with reducing firm-wide risk, the Chief Investment Office. (The trading activity is called the “Synthetic Credit Portfolio” or “SCP.”) There is much to digest in the report. Hearings are to commence today. But, even at this early date, the veil has been lifted on the complex and cavalier approach that banks take when they put the American public at risk every day in the quest for profits and personal gain. The bank’s CEO, Jamie Dimon, famously claimed that JP Morgan Chase featured the very best risk control systems in the industry. But the report makes it abundantly clear that these systems were manipulated to reduce the calculated risk of the CIO’s massive credit default swap positions. The SCP had grown from $4 billion to $51 billion in 2011, and...

This is a story of journalists and economists, and the confusion that can ensue when they communicate. For me, the story starts with a book, Dark Pools , written by Wall Street Journal Reporter Scott Patterson. The book, published in the summer of 2012, is an account of the rise of high-frequency trading or “HFT.” That is automated trading of securities and derivatives using powerful computers driven by complex algorithms. It is widely accepted that trading activity in most markets is dominated by HFT. Firms that specialize in this practice trade in enormous volumes but start and end the day with few if any holdings. Their purpose is to profit from intra-day market moves, not from fundamental investment. They buy and sell in the blink of an eye, churning the markets constantly. Mr. Patterson’s book contains the following passage: At the end of World War II, the average holding period for a stock was four years. By 2000, it was eight months. By 2008, it was two months. And by 2011, it...

Nobel economist Joseph Stiglitz made some critically important observations in the Sunday New York Times . He pointed out that income disparity is a cause of the maddeningly slow recovery from the effects of the Great Recession, not merely a consequence of it. He drew parallels to the income disparity that predated the Great Depression. In my view he is correct, though there are persuasive opinions to the contrary. One key to reducing inequality it tackling structural elements of the financial system that contribute to the widening income gap. The economy needs to promote parity, and the financial system as it currently functions is an impediment. Income disparity is illustrated by the widely known Saez-Piketty graph that garnered so much attention a few years ago: This graph cries out to be compared with another that depicts wages and education in the financial sector compared with other sectors of the economy: The academics who compiled the data on financial sector wages and...

The financial sector provides a crucial function to society. It accommodates the movement of funds from investors to businesses, governments and individuals who use the capital for productive purposes. If the financial sector does this efficiently, the cost to the users of capital will be close to the price demanded by investors. The financial sector will have extracted amounts for providing the “capital intermediation pipeline” that are commensurate with the service provided. If asked, most people would say that the cost of capital intermediation must have gone down in recent decades. After all, advances in technology and quantitative analysis must have made the process less expensive. But they have not. Capital intermediation is now more costly than it was in the days of James Pierpont Morgan. My new research points out that capital intermediation costs have been rising since 1980, coincident with the beginning of three and a half decades of deregulation. At the same time, the...